Chapter 3
Understanding Financial Statements and Cash Flows
Income Statement <ul><li>SALES </li></ul><ul><li>-  EXPENSES </li></ul><ul><li>=  PROFIT </li></ul><ul><li>Cost of Goods S...
Income Statement <ul><li>SALES </li></ul><ul><li>-  EXPENSES </li></ul><ul><li>=  PROFIT </li></ul><ul><li>Cost of Goods S...
Assemble an Income Statement <ul><li>Oper. Income (EBIT) </li></ul><ul><li>Sales </li></ul><ul><li>Interest </li></ul><ul>...
<ul><li>SALES </li></ul><ul><li>-  Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>-  Operating Expens...
<ul><li>SALES </li></ul><ul><li>-  Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>-  Operating Expens...
<ul><li>SALES </li></ul><ul><li>-  Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>-  Operating Expens...
Balance Sheet <ul><li>Total Assets  = </li></ul>Outstanding Debt + Shareholders’ Equity
Balance Sheet Assets Liabilities (Debt) & Equity
Assemble a Balance Sheet <ul><li>Machinery  Marketable Securities  </li></ul><ul><li>Notes Payable S.T.  Accounts Receivab...
Balance Sheet <ul><li>Current Assets </li></ul><ul><li>Cash </li></ul><ul><li>Marketable Securities </li></ul><ul><li>Acco...
Statement of  Cash Flows: <ul><li>Even if a company reports a large net income during a year,  the amount of cash  reporte...
Calculating the Cash Flow Stmt <ul><li>Shows the actual cash flows generated by the firm for the year broken down into thr...
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Chapter 3 Understanding Financial Statements and Cash Flows

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  • The income statement reports the results from operation the business for a period of time, can be quarterly or annually. Comprises four types of activities, 1. Sales 2. Cost of goods or services 3. Marketing, distributing, administrative costs (SG &amp;A) 4. Financing costs (interest, dividend payments)
  • And of course taxes are paid
  • HAVE CLASS ASSEMBLE AN INCOME STATEMENT ON THE BOARD
  • Balance sheet provides a shapshot of the firms financial position at a specific point in time, presenting its assets, liabilites, and owner supplied capital
  • Have students come up and enter account on blank Balance Sheet
  • Other Assets can include good will. Balance sheet represents historical cost. – not current value
  • Chapter 3 Understanding Financial Statements and Cash Flows

    1. 1. Chapter 3
    2. 2. Understanding Financial Statements and Cash Flows
    3. 3. Income Statement <ul><li>SALES </li></ul><ul><li>- EXPENSES </li></ul><ul><li>= PROFIT </li></ul><ul><li>Cost of Goods Sold </li></ul><ul><li>Operating Expenses </li></ul><ul><li>(marketing, administrative) </li></ul><ul><li>Financing Costs </li></ul>
    4. 4. Income Statement <ul><li>SALES </li></ul><ul><li>- EXPENSES </li></ul><ul><li>= PROFIT </li></ul><ul><li>Cost of Goods Sold </li></ul><ul><li>Operating Expenses </li></ul><ul><li>(marketing, administrative) </li></ul><ul><li>Financing Costs </li></ul><ul><li>Taxes </li></ul>
    5. 5. Assemble an Income Statement <ul><li>Oper. Income (EBIT) </li></ul><ul><li>Sales </li></ul><ul><li>Interest </li></ul><ul><li>Earnings before taxes (EBT) </li></ul><ul><li>Gross Profit </li></ul><ul><li>Net Income </li></ul><ul><li>Net income available to Common Stockholders </li></ul><ul><li>COGS </li></ul><ul><li>Preferred Stock Dividends </li></ul><ul><li>Operating Expenses </li></ul><ul><li>Income Taxes </li></ul>
    6. 6. <ul><li>SALES </li></ul><ul><li>- Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>- Operating Expenses </li></ul><ul><li>OPERATING INCOME (EBIT) </li></ul><ul><li>- Interest Expense </li></ul><ul><li>EARNINGS BEFORE TAXES (EBT) </li></ul><ul><li>- Income Taxes </li></ul><ul><li>NET INCOME </li></ul><ul><li>- Preferred Stock Dividends </li></ul><ul><li>- NET INCOME AVAILABLE </li></ul><ul><li>TO COMMON STOCKHOLDERS </li></ul>Income Statement
    7. 7. <ul><li>SALES </li></ul><ul><li>- Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>- Operating Expenses </li></ul><ul><li>OPERATING INCOME (EBIT) </li></ul><ul><li>- Interest Expense </li></ul><ul><li>EARNINGS BEFORE TAXES (EBT) </li></ul><ul><li>- Income Taxes </li></ul><ul><li>NET INCOME </li></ul><ul><li>- Preferred Stock Dividends </li></ul><ul><li>- NET INCOME AVAILABLE </li></ul><ul><li>TO COMMON STOCKHOLDERS </li></ul>Income Statement Operating Activities
    8. 8. <ul><li>SALES </li></ul><ul><li>- Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>- Operating Expenses </li></ul><ul><li>OPERATING INCOME (EBIT) </li></ul><ul><li>- Interest Expense </li></ul><ul><li>EARNINGS BEFORE TAXES (EBT) </li></ul><ul><li>- Income Taxes </li></ul><ul><li>NET INCOME </li></ul><ul><li>- Preferred Stock Dividends </li></ul><ul><li>- NET INCOME AVAILABLE </li></ul><ul><li>TO COMMON STOCKHOLDERS </li></ul>Income Statement Financing Activities
    9. 9. Balance Sheet <ul><li>Total Assets = </li></ul>Outstanding Debt + Shareholders’ Equity
    10. 10. Balance Sheet Assets Liabilities (Debt) & Equity
    11. 11. Assemble a Balance Sheet <ul><li>Machinery Marketable Securities </li></ul><ul><li>Notes Payable S.T. Accounts Receivable </li></ul><ul><li>Retained Earnings Accounts Payable </li></ul><ul><li>Accrued Expenses Bldgs & Land </li></ul><ul><li>Common stock (par Patents (intangibles) </li></ul><ul><li>Prepaid Expenses Long Term Notes </li></ul><ul><li>Inventories Cash </li></ul><ul><li>Mortgages Paid in Capital </li></ul><ul><li>Preferred Stock Investments </li></ul>
    12. 12. Balance Sheet <ul><li>Current Assets </li></ul><ul><li>Cash </li></ul><ul><li>Marketable Securities </li></ul><ul><li>Accounts Receivable </li></ul><ul><li>Inventories </li></ul><ul><li>Prepaid Expenses </li></ul><ul><li>Fixed Assets </li></ul><ul><li>Machinery & Equipment </li></ul><ul><li>Buildings and Land </li></ul><ul><li>Other Assets </li></ul><ul><li>Investments & patents </li></ul>Assets Liabilities (Debt) & Equity Current Liabilities Accounts Payable Accrued Expenses Short-term notes Long-Term Liabilities Long-term notes Mortgages Equity Preferred Stock Common Stock (Par value) Paid in Capital Retained Earnings
    13. 13. Statement of Cash Flows: <ul><li>Even if a company reports a large net income during a year, the amount of cash reported on its year-end balance sheet may be the same or even lower than its beginning cash. </li></ul><ul><li>To solve for the reasons why cash has changed you look at the Income Statement for the period and the change in the balance sheet over that same year. </li></ul>
    14. 14. Calculating the Cash Flow Stmt <ul><li>Shows the actual cash flows generated by the firm for the year broken down into three areas. </li></ul><ul><li>THREE AREAS </li></ul><ul><ul><ul><ul><li>Cash Flow from Operations </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Cash Flow from Investments (acquired or sold) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Cash Flow from Financing receipts or payments </li></ul></ul></ul></ul>
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